Credit card relief programs can be life-changing, allowing a person to avoid bankruptcy and get out of debt at an affordable payment. However, each debt relief program can also negatively affect a person’s credit score and not all debt relief companies operate in a transparent way. Golden Financial Services, a Better Business Bureau A+ rated California debt relief company, talks about what you need to know before joining a program and the specific downsides that come with each plan.
The truth about debt relief programs (what you need to know before joining)
Debt Relief, Settlement and Consolidation Program Fees
1. All debt relief programs include fees.
With consumer credit counseling, a company can only legally charge $50 per month. What non-profit consumer credit counseling companies often fail to tell their clients is that they also get paid from your creditors. Credit counseling companies work for the credit card companies, not only you.
Reputable debt settlement companiescharge between 15-25% of your total debt enrolled into the plan, however, these fees are only legally allowed to get charged after each of your debts are settled and paid.
Example: If you have two Bank of America credit card debts that you enroll in a settlement program and each has a balance of $5,000, the debt settlement company can only charge you $500 for each debt and this fee can only get earned after the debt is reduced and paid off.
There are no upfront fees legally allowed in a debt settlement program. However, if you use a law firm to settle your debt, attorney model debt settlement programs do charge legal fees prior to a debt getting resolved.
With debt validation programs, creditors don’t get paid anything, but fees can range from 30-45% of the total debt enrolled.
2. Do debt relief programs hurt credit scores?
Debt settlement and debt validation programs require a person to be delinquent on monthly payments (to the point where accounts get sold to a collection agency). Falling behind on payments is what hurts your credit score, not the debt relief program itself. After graduating a debt settlement program a person can be left with late and collection marks on their credit, which will remain for up to seven years. Your debts will get paid off and reported with a zero-dollar balance, but your credit score may not improve after graduating a debt settlement plan. For this reason, debt validation should be your first debt relief option if you have collection accounts. With validation, not only could you end up saving more money than with settlement services, but your debt could get removed from your credit entirely.
Reputable debt settlement companies will negotiate with creditors asking for them to agree to remove the account from their client’s credit report upon it getting settled and paid. However, not all creditors will agree to this, but sometimes they do.
According to Paul J Paquin, the CEO at Golden Financial Services, “Consumer credit counseling programs can improve your credit score; however, these plans can also hurt your credit worthiness and ability to borrow in the future”. Just because your credit score is high, doesn’t mean a lender will approve you for a loan. If lenders see that you’ve joined a consumer credit counseling plan in the past, they may deny you for any type of credit. With consumer credit counseling, this is the only debt relief program that reports you’re enrolled in the debt relief plan. This notation can remain on your credit report for at least five years.
3. Lawsuits, Tax Consequences & Other Facts You Need to Know!
Since you do need to stop paying your monthly payments to qualify for debt settlement and validation, creditors can issue you a summons to go to court. If this summons is ignored, it could turn into a judgment, allowing creditors to come after your secured assets and in some cases garnish wages. Also, default judgments have a more severe negative effect on credit scores.
When you settle a debt for less than the full amount owed, your savings could be construed as income. If you settle a $10,000 debt for $5,000, your savings is $5,000. This $5,000 savings could appear as income to the IRS. In this case, consumers can file an IRS #982 Form to eliminate the tax debt, by showing that you’re insolvent and this savings is not “earned income”.
Before joining a debt relief program make sure to check a company out at the Better Business Bureau. There are also review sites online, like at TrustedCompanyReviews.com, where you can see the top debt relief companies in the nation.